IRS May Raise Threshold for Audits of High-Income Taxpayers

The Internal Revenue Service has improved its audits of high-income taxpayers but needs to re-evaluate whether the threshold of $200,000 for auditing wealthy taxpayers efficiently uses the agency’s examination resources, according to a new report.

The report, from the Treasury Inspector General for Tax Administration, evaluated the IRS’s efforts to ensure the tax compliance of high-income taxpayers. The IRS identifies high-income taxpayers as those who reported total positive income of at least $200,000 on Form 1040. Because the IRS is devoting more audit resources to these taxpayers, TIGTA said it is important to know at what level of income or wealth taxpayers tend to begin establishing complex financial holdings that are at greater risk for noncompliance with the tax laws.

The IRS has taken a number of actions to help to ensure tax compliance of high-income taxpayers, the report acknowledged. The agency adopted a High-Income and High-Wealth strategy to audit more tax returns related to these individuals, and the resulting audit coverage of high-income taxpayers has indeed improved. However, the IRS’s High-Income and High-Wealth strategy devotes nearly 50 percent of the agency’s high-income audits to taxpayers earning $200,000 to $399,999, whose tax returns potentially present the least productivity of all high-income taxpayers.

The IRS Large Business and International Division established the Global High Wealth Industry, which takes a comprehensive approach to auditing high-income taxpayers by extending the audits beyond the individual income tax return and examines the entities that these taxpayers control. However, GHW is not yet a stand-alone industry capable of conducting all of its own examinations, the report noted. The IRS is using resources from three other LB&I industries to assist with auditing GHW cases, but has not evaluated the impact of that decision on those other industries. In addition, the IRS cannot quantify its GHW audit performance because of the limitations of IRS audit information systems. GHW has not implemented a quality review process for its audits.